Sugar High

The Daily Reckoning PRESENTS:There is plenty of money to be made in the commodities market…especially in sugar. Jim Rogers explains that if you put sugar to work for you at the right time, you would be reaping the benefits right now…

SUGAR HIGH

When I was one of the lone voices talking up commodities and China heading into the new millennium, I ran into much skepticism among the press. The writers, reporters, and anchors around the world, the so-called business media who ought to have known better, were more likely to raise an eyebrow or even turn hostile when I wanted to talk about oil, lead, and sugar more than about the “next big thing” in stocks.

Occasionally, I like to tease these media types. During one breakfast interview in a Paris hotel, a congenial writer from a French business magazine who was much more eager to discuss the falling dollar and the surging euro-for obvious reasons (Vive la France!) asked me what I would recommend for an ordinary investor like her. I plucked a wrapped sugar cube from the bowl on the table and handed it to her. She looked at me as if I had gone mad. “Put this in your pocket and take it home,” I advised, “because the price of sugar is going to go up five times in the next decade.”

She laughed, eyeing her sugar with skepticism. I told her that the price of sugar that day was 5.5 cents per pound, so cheap that no one in the world was even paying attention to the sugar business. I reminded her that when sugar prices last made their all-time record run-soaring more than 45 times, from 1.4 cents in 1966 to 66.5 cents in 1974-her countrymen were planting sugar all over France. She nodded-“Supply and demand,” she said – and pocketed her sugar. But I suspect that she has not put any of her money where her mouth – or her pocket – is.

No one had for years, which, of course, was my point. Sugar prices were so low for so long that it was the last business enterprising souls around the world would be likely to enter in the 1990s and early 2000s. If you are an ambitious young farmer in Brazil (or Germany or Australia or Thailand, also major sugar producing nations), do you choose to produce sugar at 5.5 cents a pound or soybeans, which closed 2003 near $8 a bushel, a six-year high? Even in the U.S., which has its own protected domestic sugar market at two to three times the world price, only the most efficient producers are surviving.

Sugar has had its boom times in the past – that 1974 record, and another spike in 1981 during the last bull market in commodities. And if I’m right and we’re in another long-term bull market in commodities, we’re likely to see another sugar high. Historically, nearly everything goes up in every kind of bull market, whether it’s company shares, commodities, or apartments on Park Avenue. And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong. To those of us who have been here before, it is promising to note that similar supply and demand imbalances are shaping up that could push sugar prices upward over the next decade.

The prices of a commodity usually move for a good reason, and the savvy commodities investor must be familiar with past trends and have an eye out for new ones, along with potential glitches, fundamental changes, and anything else that might affect the price of sugar. Between 1966 and November 1974, sugar made the astonishing climb, from 1.4 cents to 66.5 cents.

How do sugar prices go up more than 45 times? By the end of 1972, there had been four straight sugar seasons with record crops. Yet consumption actually outpaced supplies in 1972, literally eating into sugar inventories over the next year. The 1973-74 sugar season began with extremely tight supply conditions worldwide; demand continued to rise. There was evidence that some big industry users were stockpiling sugar in anticipation of higher prices. Soon people were grabbing sugar off the shelves in armloads to offset rising prices. Others were grabbing cubes off restaurant tables for home use. Dinner guests were arriving with five-pound bags of sugar instead of the traditional bottle of wine or bouquet of flowers. Even people who had never given the sugar futures markets a moment’s thought knew something was up when they walked into the local coffee shop and noticed that the sugar had vanished from the table. Quite simply, global demand for sugar had exceeded supply, and before long the price of sugar headed for the roof.

Everyone had a theory for the high prices. Sugar traders had no idea where prices might be when the U.S.’s long-standing price supports expired at the end of 1974; some blamed the high prices on a “scarcity of cheap labor to harvest sugarcane”; others pointed to the failure of the European sugar-beet crop. Others even suspected that both the Soviet Union, which had just suffered two bad production years in a row in its own sugar crop, and “Arab oil money” (remember that oil crisis of the 1970s?) had moved into the sugar futures markets, along with a rise in speculation by others looking to make money from rising prices.

Significant, too, was the fact that Americans had come to see cheap sugar as a birthright. Even those consumers (and food and beverage companies) who might have turned to the newest artificial sugar substitute, cyclamate, and thus decreased demand, quickly returned to the real thing when the FDA pulled cyclamate off the market in 1969 after reports that it might cause cancer.

Over the next few years, companies put sugar back into their products, boosting demand. U.S. consumption did not slow down much until September 1974, when the reality of high prices finally kicked in. Soft-drink prices increased and candy bars got smaller. But before the White House published the “Presidential Proclamation” of 1975 protecting U.S. sugar producers with the same duty rates and establishing a global quota for sugar imports into the U.S., prices were heading back down.

By December 1976 and January 1977, world sugar prices were ranging between 7 and 9 cents a pound-figures that were, according to the CRB Commodity Yearbook report at the time, “below their reported cost of production in some countries.” And many, many Johnny-come-lately sugar speculators lost their money-proving, once again, the perils of rushing into a market where prices are rising 45 times, whether it’s sugar or dot-coms. The forces of supply and demand put hysteria in its place, once again.

While three straight bumper crops assured plenty of sugar in the world – prices averaged 7.81 cents per pound in 1978 – the next season saw a few glitches in the supply chain, as a result of events around the world.

For the next 20 years – during a bear market in commodities – sugar remained plentiful, with bearish prices zigging and zagging at the low end with a few minor spikes, as typically happens in bear as well as bull markets. Gradually, sugar had gone from a respectable commodity that fed the world and supported entire economies to a victim of changing fashions in diet and health: sugar was bad for you; it made you fat, it made kids hyper, and it rotted their teeth. Meanwhile, in labs all over the world chemists were looking for substitutes, preferably noncarcinogens.

In 1981, the U.S. Food and Drug Administration approved the artificial sweetener aspartame, and in a flash this newcomer replaced sugar in cookies, cakes, and other favorite snacks sold around the world. Diet colas were becoming more popular because they had less sugar, and if the sugar’s competition had not become tough enough, in 1983 the major soft-drink companies started using literally millions of tons of high-fructose corn syrup to sweeten their beverages. Bad for sugar. (But good for corn, and a great example, by the way, of how researching one commodity might turn up some moneymaking possibilities in a different one.)

By 1985, the price of sugar had made it all the way down to 2.5 cents. No one wanted to be in the sugar business. They were giving away seats on the sugar exchange at the New York Board of Trade.

Sugar prices stayed in a bear market for the next 19 years, and were still bearish that day in early 2004 when I was teaching the French business writer about her future as a sugar baroness. World production of raw sugar had reached a record level in the 2002-03 season, and the next season produced almost as much. Brazilian exports were also at a record high. That French writer had reason to be skeptical: The price of sugar, after all, at 5.5 cents per pound at the time was not that removed from the 1.4 cent figure of 38 years earlier and a lot closer to that 2.5 cent number of 1985. In fact, most prognosticators were saying, as one analyst for the Australian and New Zealand Banking Group put it at the end of 2003 in a brief report about the market that I read, “sugar prices were likely to remain under downward pressure.”

So why was I, a few months later, confidently telling someone to buy sugar? Supply and demand. Of course, I was already a firm believer in the fact that a bull market in commodities was under way, and if, as I’ve noted, the history of past bull markets tells us that nearly everything makes a new all-time high, why not sugar?

Regards,

Jim Rogers
for The Daily Reckoning
March 9, 2006

Jim Rogers helped found the Quantum Fund with George Soros. He has taught finance at Columbia University’s business school and is a media commentator worldwide. He is the author of Adventure Capitalist and Investment Biker. He lives in New York City with his wife, Paige Parker, and their 18-month-old daughter, who is learning Chinese and owns commodities but doesn’t own stocks or bonds.

The essay you just read was taken from Jim’s third book, Hot Commodities. You can order your copy here:

Hot Commodities

If the stock market were an old broken-down car, it would have been towed away by now. It has barely moved for years. Rust has eaten up the hood. Trees poke through the wheel wells. Investors who bought “the market” in the late ’90s see their investments still sitting there – just where they were when they first bought them.

The same could be said for the dollar and bonds. They have hardly twitched in several years. Every time we look, we get about $1.20 per euro. Bond yields remain under 5%.

That last item is the most peculiar. It is as if someone had abandoned a shiny new Porsche in a bad neighborhood and the locals had forgotten to steal the hubcaps. U.S. government 30-year bonds, at less than five percent, are an invitation to larceny, as near as we can tell. What hope does the lender have of ever seeing his money again? What will the dollar be worth in 2036? How much will the bond be worth then? Someone is being set up for a major loss. You’d expect investors to take advantage of it…snapping up lenders’ money as if they were ripping out radios from parked cars.

And yet, there is a curious and eerie silence, when it comes to the risks. No one is talking. Just look at the options market. The cost of protecting against risk hasn’t been lower since 1998, just before Long-Term Capital Management blew up. Yet, the cat seems to have grabbed all warning tongues. Still, in yesterday’s International Herald Tribune, we managed to find one that got away.

“Investors appear to believe that for some reason the age of globalization has made the prospect of a global economic meltdown remote,” writes Daniel Wagner, “and that the global economy will recover from whatever is thrown in its way.”

“What might be thrown in its way?” we wonder out loud. Oil trades at $65 a barrel, with no major disruption in tight supplies, Wagner notes. But, what would happen if terrorists took out a major oil field or pipeline. What would happen if a major producer went “off line,” or major oil terminals were to be attacked? What would happen if the price simply went up? The whole world economy could suddenly shrink like a deflating balloon.

Wagner doesn’t pose the question, but what would happen if another big hedge fund went bust, the derivatives market suddenly imploded, Wall Street crashed, or the Bush administration attacked Iran? What would happen if China flew off the rails, a Y2K-type virus were to clog up the world’s communications, or an avian flu-type virus were to clog up the world’s lungs?

Colleague Dan Denning, another person whose tongue the cat hasn’t got, sends this note:

“The U.S. Treasury hit the debt ceiling and had to raid the exchange stabilization fund and disabled civil servants pension to meet current obligations…over $1 trillion in government borrowing has to be rolled over this year. Over $614 billion of long-term debt matures this year…meaning over $1.6 trillion in funding has to be floated in the market, at rising interest rates, for the government to meet its obligations to current bond holders and entitlement recipients.

“It’s a grim looking situation for the Empire, and explains why 10-year treasury yields hit 4.75% yesterday, the highest since the Fed began cutting rates. Ten-year rates are finally moving up. Greenspan’s conundrum is disappearing, one basis point at a time.”

In a similar vein, our own MoneyWeek magazine carried an article last week explaining how Japan’s rising interest rates could finally knock the pins out from under America’s real estate bubble. Today’s International Herald Tribune picks up the story with a front-page headline: “Bank of Japan facing a momentous decision.” Investors have enjoyed a field day, borrowing from Japan at zero interest and sticking the money all over the world – including in U.S. debt (Thereby helping to hold U.S. mortgage rates down). This surge of money has lifted house prices in Las Vegas and stock prices in India (up 42% last year). What will happen when it stops?

“The five-year free ride is coming to an end,” say some economists. But you wouldn’t know it from all the people queuing up at the station. In the face of rising risks, people have never been more confident or more eager to get on board. The modern democratic capitalism cannonball, driven by enlightened central bankers, adjusts fluidly and painlessly, they tell themselves sagely. That is what markets are supposed to do; they are constantly toting up the odds of trouble, constantly hedging, constantly looking down the tracks ahead and adapting.

Maybe so, but occasionally markets also make mistakes. The joy train riders are all reading the same newspapers and the watching the same TV channels; they are all borrowing from Japan and investing in the United States. And all of these riders eventually come to believe more or less the same thing; it’s something they all desperately want to believe, something that flatters them, something that comforts them and something that ultimately ruins them.

Yes, dear reader, that is how it works. Risks do not go down just because people do not see them. The more sure people are that they have nothing to fear, the less ready they are for bad news. And then, when it comes, they are shocked and appalled – and ruined.

We do not buy gold because we know there is bad news coming. Bad news always comes. We buy gold because we suspect that most people are not prepared for it.

More news from our team at The Rude Awakening…

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Dan Denning, reporting from Melbourne, Australia:

“If you feel like things are rumbling out of control and that something big and important is happening, well, then, you’re not alone. But what does all of it mean for gold, for the dollar, for oil, for America?”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

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Bill Bonner, back in London with more views…

*** The votes are in…the House Appropriations Committee voted 62-2 to bar Dubai Ports World, a United Arab Emirates backed company, from holding contracts at U.S. ports.

“This is a national security issue,” said Rep. Jerry Lewis, the chairman of the House panel, adding that the legislation would, “keep American ports in American hands.”

Well, as patriotic as that sounds, the London-based Peninsular & Oriental Navigation Company previously owned the five U.S. ports in question. Last we checked, London was in Great Britain, not America. And what about the other foreign-operated shipping terminals in the United States? China already runs a terminal at the Port of Los Angeles and Singapore runs terminals in Oakland…are we going to shut those down?

Another major detail the House seems to have conveniently overlooked – the UAE are our allies. U.S. Navy ships call at the port of Dubai, and the U.S. Air Force uses UAE airfields to launch missions into Iraq and Afghanistan. In addition, the UAE donated $100 million to Katrina relief – more than four times any other countries contribution combined.

“The lopsided House committee vote shows that the bull market in economic nationalism rolls on,” says Capital and Crisis’ Chris Mayer.

“Not only in the United States, but abroad as well. We have the French government trying to block an Italian bit for Suez. We have the Spanish government trying to block a German bid for Endesa. We have the Polish government trying to quash an Italian takeover of a German bank because it involves Polish subsidiaries…

“This is starting to sound like a joke. But it’s real and a new global depression hangs in the balance. The more governments push, the closer we get to the edge of a very mean cliff…”

*** “The price of sugar is going to go up five times in the next decade,” Jim Rogers predicted in 2004. Since then, sugar is up threefold, recently hitting 17.21 cents – the highest level in 24 years. That’s a better performance than oil, gold or a lot of other commodities.

“Brazil uses part of its sugar output for ethanol, more so when the price of gasoline is high,” Chris Mayer tells us. “That sort of shift has a big impact on the sugar markets, as ethanol production consumes more and more sugar. Current forecasts hold that about 80% of Brazil’s output will wind up in Brazilian cars.”

“That’s one part of the demand equation. But there’s more. The human race has quite a sweet tooth. Not only is there increasing demand for sweets in Western markets, but also there is also steady demand from places like India (the world’s largest consumer of sugar), Pakistan, Russia and China.”